SWFs have invested $30bn in US financials

Banking on foreign money (GETTY IMAGES)

By

Yazad Darasha

PublishedSaturday, April 26, 2008

Sovereign wealth funds have made direct investments of more than $30 billion (Dh110.1bn) in the United States financial firms since August 2007, including $17bn in commercial banking organisations such as Citigroup, a senior American official told the Senate. Globally, there are 30 to 40 sovereign funds operational.

Scott G Alvarez, General Counsel of the US Federal Reserve Board, told the Senate Committee on Banking, Housing and Urban Affairs that this investment is part of the approximately $100bn US banking organisations have raised in the past eight months. “During this period, sovereign wealth funds have been an important source of capital for US financial institutions,” he said.

“The ability of US financial institutions to raise large amounts of capital from a diverse domestic and international investor base under stress conditions shows market confidence in the transparency and ultimate resiliency of these institutions.The Federal Reserve has welcomed and encouraged capital raising initiatives that buttress the financial strength of US financial institutions and better positions these institutions to weather the financial turmoil.”

Sovereign funds’ multi-billion-dollar injections into battered US banks such as Citigroup and Merrill Lynch have raised concerns that foreign governments might be investing for political reasons rather than financial gain, and might someday use those stakes to advance their own national interest.

The recent wave of sovereign fund investments in US financials consists of non-controlling investments below 10 per cent [and often below five per cent] of voting equity, Alvarez said. Citigroup received a capital infusion from the Kuwait Investment Authority (KIA), the Abu Dhabi Investment Authority (ADIA), and the Government of Singapore Investment Corporation (GIC).

None of these acquired more than five per cent each.

Three sovereign funds, the Korea Investment Corporation (KIC), Temasek, and KIA, each made similar non-controlling investments in convertible preferred stock in Merrill Lynch.

“The press releases from the financial institutions announcing each of these recent investments have generally emphasised that these sovereign investors will not seek to exercise control over the target company and will not have representation on the board of directors or take part in its management,” Alvarez told the committee.

“Many funds were originally set up to help stabilise revenues from the sale of a commodity, such as oil, natural gas or other commodities. They also provide a way to preserve and grow wealth for future generations.

“Chile, Botswana and Kiribati have established funds based on their revenues from the sales of copper, diamonds, and phosphate. Examples of governments that have established funds using oil revenues include Norway, Kuwait and Alaska,” he said.

Other sovereign funds deploy foreign exchange accumulated as the result of trade imbalances or currency intervention. Countries with this type of fund include Singapore, Korea, and China.

However, while the estimated $2 trillion to $3trn sovereign funds manage exceeds the $1.4trn managed by hedge funds, it is much less than the $15trn managed globally by pension funds, the $16trn managed by insurance companies, or the $21trn managed by investment companies. It is an even smaller fraction of global debt and equity securities, which exceed $100trn.

Ban on funds could boomerang

Barring non-US government-owned funds from investing in the United States could create market distortions, a senior Securities and Exchange Commission official said. “If we were to prohibit sovereign wealth funds from investing in our market for fear they might introduce market distortions, there is a risk we might actually end up doing precisely this ourselves through the prohibition,” said director of international affairs Ethiopis Tafara.

But rather than blocking the funds, Tafara said “a better approach might be to address the underlying issues of transparency, independent regulation, depoliticising of investment decisions and conflicts of interest”.

The Bush administration has repeatedly said the US welcomes foreign investment; however, protecting the country’s economic and national security have become a key issue with SWFs.